CRR/CRD RWA Calculation Methodology

Risk-weighted assets (RWA) are a regulatory measure that assigns a risk weight to each asset on a bank's balance sheet. The RWA formula multiplies the exposure value by the corresponding risk weight: RWA = Exposure × Risk Weight. A bank's total RWA comprises three components: RWA for credit risk, RWA for market risk, and RWA for operational risk. The higher the RWA, the more capital the bank must hold under CRR. The minimum capital ratio (CET1) stands at 4.5% of risk-weighted assets, plus capital buffers.

The CRR provides two fundamental approaches for credit risk RWA calculation: The credit risk standardised approach (SA), which applies regulatory risk weights per exposure class and external rating, and the internal ratings-based approach (IRB). The IRB approach differentiates into the Foundation IRB (F-IRB), where the bank estimates only the probability of default (PD) internally, and the Advanced IRB (A-IRB), where the bank additionally models LGD, EAD and maturity internally. Internal models can reduce RWA by 15–35%, but require extensive data history, model validation and supervisory approval.

The output floor is one of the most significant innovations of CRR III (EU implementation of Basel III final). It limits the capital benefit of internal models by requiring that RWA from internal approaches must not fall below 72.5% of the RWA that would result from the standardised approach. The phase-in runs from

2025 to 2030. For banks using IRB models, this means: even with favourable internal risk estimates, they must hold at least 72.5% of standardised approach RWA as capital. Institutions should implement parallel calculation (dual stack) early to quantify the output floor's impact on their capital ratios.

RWA optimization encompasses several levers, all within the regulatory framework: First, improving data quality for more accurate risk parameters (PD, LGD, EAD). Second, optimal recognition of collateral and guarantees to reduce risk weights. Third, portfolio steering through targeted reallocation into exposure classes with lower risk weights. Fourth, using credit risk mitigation techniques (CRM) such as netting, collateralisation or credit derivatives. Fifth, regular benchmarking of own RWA density against peer institutions. ADVISORI supports this process with a structured methodology assessment that identifies optimization potential and implements it in a regulatory-compliant manner.

Under the credit risk standardised approach (SA) per CRR, regulation assigns fixed risk weights to each exposure class: exposures to central governments and central banks can be 0% (with best credit quality), exposures to institutions 20–150% depending on rating, corporate loans 20–150% depending on credit quality step, retail exposures typically 75%, residential real estate secured exposures 20–70% (CRR III tightens loan-to-value requirements here), and defaulted exposures 100–150%. CRR III also introduces more granular risk weights for specialised lending and real estate exposures and strengthens the role of external ratings.